As for the question of making the right China call, I use commodity prices as the canaries in the coal mine of global growth and inflationary expectations. If and when they turn down, that will be the signal to exit the risk trade in general and China specifically.

If the Chinese do start pulling their money out of real estate, one reporter called to ask me, where would they put it? After all, one of my arguments for why people in China use property as a “store of value” is lack of attractive alernatives. Well, assuming they successfully find a buyer (which is always the problem when everybody decides to sell), there are three possibilities:

They put it into other assets. Last spring, when Chinese investors got spooked about government plans to “cool” the real estate sector, a lot of them started putting their money into gold instead. Jade, artwork, antiques, or even stockpiles of commodities like copper or nickel are potential alternatives. We could even see a situation where Chinese investors bail out of real estate in some cities, which they see as vulnerable, only to buy property in others — in which case, we could see some markets drop while others continue rising, for now at least.
They spend the proceeds. If Chinese investors decide to cash out of real estate, and try to turn the proceeds into buying power to improve their quality of life, expect a surge in consumer inflation. Given the explosion in China’s money supply (by more than 50% over the past two years), the question isn’t why inflation is treading 5%, but why we haven’t seen more inflation sooner. The main reason is because most of that new money went into investment rather than consumption, mainly fueling asset inflation. But if those inflated asset values are suddenly transformed into higher consumer demand, the CPI rates we’ve seen so far will look like small potatoes.
They hoard the cash. If this happens, the velocity of money will drop and the money supply will decline — in effect, a lot of the money that was created the past two years will simply disappear. This is what happens during a credit crisis, and it’s called liquidation. The good news: no more worries about inflation. The bad news: a lot of financial assets people thought they owned will go up in smoke.

Item #4: Chinese Backdoor Listings in the US. Right after Dialogue, I also appeared on the nightly news program, China 24, talking about the market impact of recent accounting scandals involving Chinese backdoor-listed stocks in the US. You can watch the lead-in story here, and my short interview here. To tell you the truth, this is a situation that a lot of people — myself included — saw coming years ago. I remember a bunch of dubious pibao gongsi (“suitcase companies” – guys with little more than a suitcase and a cellphone) running around offering to do backdoor listings for pretty much anything, and it seemed like a very murky business. I’m hardly surprised to learn that some of the companies that did list this way were outright frauds. That being said, there are plenty of companies — I’m not going to name names, but I think I could name quite a few — that are perfectly legit and are being tarred with the wrong brush. As I say in my interview, this presents a real opportunity for someone to take these companies private and reposition them — something I think you’ll see quite a bit of in the days ahead.